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Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growh in the EU

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  • Mariarosaria Comunale

    () (Economics Department, Bank of Lithuania)

Abstract

In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994–2012, with annual frequency. We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003–2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments. In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.

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  • Mariarosaria Comunale, 2016. "Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growh in the EU," CEIS Research Paper 379, Tor Vergata University, CEIS, revised 23 May 2016.
  • Handle: RePEc:rtv:ceisrp:379
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    Cited by:

    1. Mariarosaria Comunale, 2017. "Synchronicity of real and financial cycles and structural characteristics in EU countries," CEIS Research Paper 414, Tor Vergata University, CEIS, revised 25 Sep 2017.
    2. Fidora, Michael & Giordano, Claire & Schmitz, Martin, 2017. "Real exchange rate misalignments in the euro area," Working Paper Series 2108, European Central Bank.
    3. repec:onb:oenbfi:y:2018:i:q3-18:b:13 is not listed on IDEAS
    4. repec:eee:jeborg:v:142:y:2017:i:c:p:140-163 is not listed on IDEAS
    5. Comunale, Mariarosaria, 2018. "Current account and real effective exchange rate misalignments in Central Eastern EU countries: An update using the macroeconomic balance approach," Economic Systems, Elsevier, vol. 42(3), pages 414-436.
    6. repec:sph:rjedep:v:7:y:2018:i:4:p:29-42 is not listed on IDEAS
    7. Mariarosaria Comunale & Jonas Striaukas, 2017. "Unconventional Monetary Policy: Interest Rates and Low Inflation. A Review of Literature and Methods," Bank of Lithuania Occasional Paper Series 13, Bank of Lithuania.
    8. Claire Giordano, 2018. "Price and cost competitiveness misalignments of the euro area and of its main economies according to a quarterly BEER model, 1999-2017," Questioni di Economia e Finanza (Occasional Papers) 444, Bank of Italy, Economic Research and International Relations Area.
    9. Rünstler, Gerhard & Balfoussia, Hiona & Burlon, Lorenzo & Buss, Ginters & Comunale, Mariarosaria & De Backer, Bruno & Dewachter, Hans & Guarda, Paolo & Haavio, Markus & Hindrayanto, Irma & Iskrev, Nik, 2018. "Real and financial cycles in EU countries - Stylised facts and modelling implications," Occasional Paper Series 205, European Central Bank.
    10. Mariarosaria Comunale, 2016. "A Closer Look at EU Current Accounts," CEIS Research Paper 393, Tor Vergata University, CEIS, revised 11 Aug 2016.
    11. Mariarosaria Comunale, 2017. "A panel VAR analysis of macro-financial imbalances in the EU," Bank of Lithuania Working Paper Series 40, Bank of Lithuania.
    12. repec:gam:jecomi:v:7:y:2019:i:1:p:23-:d:216954 is not listed on IDEAS
    13. Beckmann, Joscha & Czudaj, Robert, 2017. "Capital flows and GDP in emerging economies and the role of global spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 140-163.
    14. Mariarosaria Comunale, 2019. "Long‐run determinants and misalignments of the real effective exchange rate in the EU," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(5), pages 649-672, November.

    More about this item

    Keywords

    real effective exchange rate; behavioural effective exchange rate; foreign capital inflows; FDIs; Dutch disease; GDP growth; European Union;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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